The RBI on Friday refused to change its mind about interest rates despite economic growth hard landing in Q2, FY25.
In fact, in his very opening remarks, Governor Shaktikanta Das sort of vowed to protect peace with blood reminding about the central bank's price stability mandate and its commitment to the flexible inflation target comes before everything else.
In other words, growth must stand on its own given the threat of inflation, particularly food prices which continue to run like a frightened horse.
The six-member monetary policy committee (MPC), in a 4-2 split vote kept repo rate unchanged at 6.5% for the eleventh straight meeting, but the central bank slashed real GDP growth forecasts to a soul-crushing 6.6% from 7.2% for FY25, and raised inflation forecasts upwards to 4.8% for FY25.
Following the Q2 GDP shocker, where growth slowed down to a 7-quarter low of 5.4%, a consensus for a 25 bps repo rate cut formed like a thick layer on rice pudding. But Das maintained that the economic slowdown has bottomed out in Q2 and that the current quarter and next quarter will see a growth upside.
If not a repo rate cut, markets anticipated quantitative liquidity-boosting measures and in line with expectations, RBI announced a 50 bps cut in Cash Reserve Ratio (CRR), indicating that it’s the best kind of nourishing it can offer for the economy.
The proposed CRR cut will come in two equal tranches of 25 bps, spreading over two fortnights from December, 14 and December, 28 and will restore it to 4%, which was the prevailing rate before the policy tightening cycle began in April, 2022. CRR is the proportion of deposits banks set aside as cash and Friday's move is expected to infuse Rs 1.16 lakh crore liquidity to the banking system, facilitating bank lending and also lower market interest rates. Currently, CRR is held at 4.5% since March, 2020.
Meanwhile, RBI has slashed FY25 growth forecast sharply to 6.6% from its previous estimate of 7.2%. It expects Q3 and Q4 growth at 6.8% and 7.2%, respectively. For Q1 and Q2, FY26, real GDP growth is pegged at 6.9% and 7.3%, respectively.
According to Das, the sharper-than-expected slowdown in Q2 of the current fiscal was led largely by a deceleration of industrial growth, which in turn was affected by subdued manufacturing, contraction in mining and lower electricity demand. The unexpected slowdown in growth raises questions about whether the restrictive monetary policy to rein in inflation is dampening activity and ending up as a cause than a cure.
As it is calls for cuts have come from none other than Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal, while analysts reason that February may be too late to cut, and could force the central bank to compensate with a larger-than-expected cut at its next meeting.
But the central bank insists that the worst was over and that high frequency indicators confirm that the growth slowdown bottomed down in Q2.
Citing data, Das explained that the purchasing manager's index remains elevated, indicating robust economic activity. As for inflation, RBI raised the forecasts upwards to 4.8% from 4.5% for FY25, while Q3 and Q4 are estimated to settle at 5.7% and 4.5%, respectively. Likewise, Q1, FY26 inflation forecast is set at 4.6%, and Q2 at 4%.
In October, retail inflation accelerated to a 14-month high of 6.21%, surging past RBI's upper tolerance band of 6%. Moreover, food prices are expected to linger throughout the current quarter, but are expected to ease in Q4, until then the MPC will continue to sharpen its rate-cut sword.
As Das himself noted, the last mile of inflation is proving to be both prolonged and arduous, which is why he ruled out an immediate rate cut last month and even now.
